We examine the information transmission role of stock recommendation revisions by sell-side security analysts. Revisions are associated with economically insignificant mean price reactions and often piggyback on recent news, events, long-term momentum, and short-run contrarian return predictors, typically downgrading after bad news and upgrading after good news. However, the revisions are usually information-free for investors. The findings go against the long-standing view that recommendations are an important means by which analysts assimilate information into stock prices. They disagree with the view of policymakers that analysts’ stock picks materially impact stock prices.

Expected discounting in seasoned equity offers is a cost of uncertainty about firm value, marketing new shares, and acquiring information that raises the offer price. Stockholders incorporate predictable discounting in stock prices when equity offers are first announced. The surprise component of discounting, reflecting the lead bank's final adjustment to the offer price, releases information that often causes economically large price swings on the offer day. Disparities between the issuer's closing price and the price suggested in the lead bank's final order book are a primary source of information. The discount surprise appears to be used by lead banks to update capital suppliers with that eleventh-hour information before they commit their funds.

Journal Article Are There Economies of Scale in Underwriting Fees? Evidence of Rising External Financing Costs Get access Oya Altınkılıç, Oya Altınkılıç Virginia Tech Search for other works by this author on: Oxford Academic Google Scholar Robert S. Hansen Robert S. Hansen Virginia Tech Address correspondence to Robert S. Hansen, Department of Finance, Pamplin College of Business, Virginia Tech, Blacksburg, VA 24061, or e-mail: [email protected]. Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 13, Issue 1, January 2000, Pages 191–218, https://doi.org/10.1093/rfs/13.1.191 Published: 15 June 2015

This paper examines post-revision return drift, or PRD, following analysts’ revisions of their stock recommendations. PRD refers to the finding that the analysts’ recommendation changes predict future long-term returns in the same direction as the change (i.e., upgrades are followed by positive returns, and downgrades are followed by negative returns). During the high-frequency algorithmic trading period of 2003–2010, average PRD is no longer significantly different from zero. The new findings agree with improved market efficiency after declines in real trading cost inefficiencies. They are consistent with a reduced information production role for analysts in the supercomputer era.

We assess investment banks’ influence over the agreement between their analysts’ research behavior and their clients’ interests, in the post-reform era. Competing banks discipline their analysts with worse career outcomes for producing biased reports, issuing shirking reports, and for involvement in the earnings guidance game, showing meaningful monitoring of their analysts. Highly reputable banks provide more monitoring discipline of their analysts and bonding of their moral hazard than other banks. The findings agree with the banks taking responsibility for aligning analysts’ behavior with clients’ interests.